Educational Articles

Stock Screen: Best & Worst Performing Industries - July 6, 2012

Robert M. Greene, CFA
| July 06, 2012

Among the many features found in each week’s edition of Value Line’s Selection & Opinion is a list of the seven best and worst performing industries over the past six weeks. These rankings can be found on the inside back cover of Selection & Opinion. The roughly 1,700 stocks in the Value Line universe are currently divided among about 100 industries. Notably, for the purposes of calculating these results, the performance of each stock is equally weighted to the others in its industry (i.e., irrespective of market capitalization). This data also forms the basis for the Relative Strength price charts found on each industry page in The Value Line Investment Survey.

Taking a look at this week’s best and worst performing lists, we see how quickly investor sentiment toward different industries can change. Over a two-month stretch beginning in late March, many of the leading benchmarks suffered high single-digit to low double-digit declines. Investors would have been hard-pressed to generate significant returns in any industry during this period. Still, those who favored conservative, high-yielding holdings would have stood the best chance of avoiding the damage. By the time of our June 5th rankings, for instance, only seven industries were able to show positive share-price performances for the trailing six-week period. Five of these were utility-related industries.

Jumping ahead to early July, we find the situation has changed considerably. Though still off from its 2012 high, the market has made good (albeit erratic) progress over the past month putting the recent spring correction behind it. In fact, the Value Line Arithmetic Average for the trailing six weeks has turned positive for the first time since mid-April, rising 4.2% between May 21st and July 2nd. Not surprisingly, the utilities are now nowhere to be found in our top seven. In their places, we find mostly more volatile industries, such as Homebuilding (up 18.7%), Building Materials (13.4%), Newspaper (12.9%), and Public/Private Equity (10.6%).

One of the more notable industries on this week’s list is Medical Services (up 12.3%). Generally speaking, this group is not known for being especially volatile. It was, however, one of the industries with the most at stake in the recent Supreme Court ruling regarding the constitutionality of 2010’s Affordable Care Act. Notably, despite the industry’s presence on our best-performing list, the recent decision, which affirmed most of the key provisions of the law, was not universally well received by investors in the medical-services arena. In fact, most of the largest companies (by market capitalization) in this field, such as Aetna (AET), CIGNA (CI), Humana (HUM), UnitedHealth Group (UNH), and WellPoint (WLP), sold off on the news. Various elements of the law, such as guaranteed insurance coverage for individuals with pre-existing conditions, are likely to have negative profit implications for these providers of healthcare benefits. On the other hand, hospital stocks advanced nicely. The law should mean more customers for the likes of Community Health Systems (CYH), Health Management Associates (HMA), and Tenet Healthcare (THC).

Investors also seem confident that the ruling will be good for business at Healthways, Inc. (HWAY). Its programs primarily serve members suffering from chronic illnesses, including diabetes and cardiac and respiratory diseases. The company’s track record in recent years is uninspiring, and that trend has continued into 2012. Weighed down by the loss of a contract with CIGNA, full-year earnings will likely fall nearly 35%, to $0.45 a share. Beyond this, though, changes in the healthcare industry in the years ahead, including those driven by recent legislation, figure to provide the company with solid long-term growth opportunities. By mid-decade, in fact, share net should once again be approaching the 2008 peak of $1.50. On this basis, HWAY stock provides the potential for substantial 3 to 5 year price appreciation. Investors, though, should note this equity’s low marks for Price Stability (20 out of 100) and the absence of a dividend before taking a position here.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.